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CBAM and Indian Aluminium: Why Electricity Source Will Become the Decisive Competitive Variable and What Every Smelter Must Do Before the 2027 Review
CBAM currently covers only direct Scope 1 emissions for Indian aluminium — making today’s exposure manageable. But a 2027 European Commission review will evaluate expanding coverage to Scope 2 indirect electricity emissions for aluminium, steel, and hydrogen. When that expansion happens, Indian coal-based smelters carrying 12–18 tCO₂/t of embedded emissions will face levies that approach or exceed the entire production cost of aluminium. The window to prepare is open now. Smelters that invest in renewable electricity in this period build insurance against a regulatory change that will be commercially catastrophic for those who are unprepared.
Today: CBAM for aluminium covers only direct Scope 1 emissions — anode combustion, PFC emissions, and fuel combustion in ancillary processes. The CBAM benchmark for primary aluminium electrolysis is 1.423 tCO₂/t. Indian smelters operating at or near this benchmark face minimal certificate costs under the current framework. This is a temporary reprieve, not a structural advantage.
The gap: India’s coal-based captive power plants emit approximately 0.90–1.05 tCO₂/kWh. At 14,000–15,000 kWh per tonne of aluminium, Scope 2 indirect emissions add 12.6–15.75 tCO₂/t — eight to ten times the direct process emissions. A hydro-powered smelter in Iceland or Norway carries total embedded emissions of 1–2 tCO₂/t. That gap is not yet priced by CBAM — but the 2027 review exists precisely to address it.
The 2027 risk: If the Commission extends Scope 2 coverage to aluminium, Indian coal-based smelters would face CBAM levies of €950–1,966/t at current and projected 2030 carbon prices — against an LME aluminium price of approximately €2,000–2,500/t. This would make Indian primary aluminium economically non-exportable to the EU. No pricing or efficiency strategy absorbs a cost of this magnitude without structural change in electricity source.
Unique to aluminium: Unlike steel (where CBAM excludes Scope 2 and RE investment provides no CBAM benefit), every unit of renewable electricity procured by an Indian aluminium smelter will directly reduce CBAM Scope 2 embedded emissions once the extension occurs. RE investment today simultaneously reduces electricity cost, improves CCTS GEI compliance, and builds CBAM insurance — a three-way financial alignment unique to this sector.
The window: India’s Big Four — Vedanta, Hindalco, NALCO, BALCO — have committed USD 5 billion and 20 GW of renewable energy by 2030. Vedanta’s current RE share is 5%. NALCO signed a fresh 1,080 MW thermal CPP MOU in February 2026. The pace of RE adoption between now and the 2027 review will determine whether Indian aluminium is positioned for EU market access or locked out of it through the 2030s.
The structural difference — why aluminium and steel face CBAM differently
The most important starting point is understanding how aluminium and steel are treated differently under CBAM — not because of any current difference in Scope 2 coverage (both currently exclude it), but because of what a future Scope 2 extension would mean for each sector’s competitive dynamics.
For steel, electricity is a secondary emission source. A blast furnace-BOF route is dominated by coke combustion and iron ore reduction chemistry — Scope 1 emissions of 1.8–2.2 tCO₂/t. Even if Scope 2 were eventually added for steel, the incremental exposure for Indian mills would be meaningful but not existential. For aluminium, the situation is fundamentally different. Electricity is the primary input and primary emission source. The Hall-Héroult electrolytic reduction process consumes 14,000–15,000 kWh per tonne of aluminium — making electricity the dominant cost and the dominant carbon source simultaneously.
For steel, a Scope 2 extension would add a meaningful but manageable additional cost — electricity is perhaps 10–15% of total embedded emissions for a BF-BOF producer. For Indian primary aluminium from a coal CPP, electricity is 80–85% of total embedded emissions. Extending Scope 2 to aluminium is therefore not a marginal adjustment — it is a transformation from a €0–73/t CBAM cost to a potentially €1,500–2,000/t CBAM cost. No other sector faces a comparable step-change from a single regulatory decision. This asymmetry is why every Indian aluminium smelter needs to treat the 2027 review as the most important external risk event of the decade.
Current exposure: What CBAM actually costs Indian aluminium producers today
Under the current Scope 1-only framework, India’s aluminium CBAM exposure is modest — concentrated in the gap between each installation’s direct process emission intensity and the 1.423 tCO₂/t benchmark (revised downward from earlier drafts under the December 2025 implementing act).
| Scope covered | Typical emission intensity | Gap above benchmark | Cost at €75.36/tCO₂ (Q1 2026 actual) | Cost at €85/tCO₂ (2026 avg. consensus) | Cost at €126/tCO₂ (2030 consensus) |
|---|---|---|---|---|---|
| Scope 1 only (current CBAM) | 1.4–2.0 tCO₂/t | 0–0.58 tCO₂/t | €0–44/t | €0–49/t | €0–73/t |
| Scope 1 + 2 (future) — coal CPP | 14–18 tCO₂/t | 12.6–16.6 tCO₂/t | €950–1,250/t | €1,071–1,411/t | €1,588–2,092/t |
| Scope 1 + 2 (future) — renewable power | 1.4–2.0 tCO₂/t | 0–0.58 tCO₂/t | €0–44/t | €0–49/t | €0–73/t |
The table makes the scenario stakes clear. Today’s Scope 1-only levy of €0–44/t is commercially manageable — an annoyance, not a crisis. A Scope 1+2 levy of €950–2,092/t under coal power is not manageable under any scenario. It approaches or exceeds the entire production cost of aluminium and would effectively close EU market access for coal-dependent Indian primary producers. BloombergNEF’s 2030 carbon price forecast of €149/tCO₂ would push the upper scenario above €2,400/t.
That is not a regulatory outcome the European Commission intends — but it is the mathematical consequence of extending CBAM to indirect emissions without Indian producers having first transitioned their electricity mix. The rational policy response from Indian producers is to use the current window of manageable Scope 1 costs to fund the renewable transition that prevents the Scope 2 scenario from ever being triggered against them.
The future risk: What the 2027 Scope 2 review means in practice
The European Commission’s commitment is to publish a report in 2027 evaluating how to extend CBAM scope to indirect emissions for iron, steel, aluminium, and hydrogen. This is an evaluation exercise, not a committed legislative timeline. However, the direction of travel is unambiguous — the Commission has explicitly stated it does not consider the current CBAM scope to be permanent, and has signalled intent to expand coverage.
CarbonChain’s modelling estimates that when CBAM expands to cover indirect emissions for metals, the average cost increase for importers could be as high as 500%. For Indian aluminium specifically — where electricity accounts for 80% of total embedded emissions and almost all of that electricity comes from coal — the figure could be far higher. This is a modelled scenario based on current emission intensities, not a regulatory determination. But the order of magnitude is consistent with the arithmetic: 12–16 tCO₂/t of additional Scope 2 exposure at €80–130/tCO₂e produces precisely this cost range. The scenario is not alarmist — it is the direct mathematical output of coal CPP emission factors and projected carbon prices.
The competitive gap: India versus hydro-powered producers
The physical reality of Indian aluminium’s emissions position relative to global competitors is already stark — the 2027 review would simply be the moment CBAM begins to price it. The comparison below shows current embedded emission intensities under a Scope 1+2 scenario, to illustrate what the regulatory change would expose.
~€6/t post Scope 2
~€46/t post Scope 2
~€450–600/t post Scope 2
~€820–1,050/t post Scope 2
~€950–1,250/t post Scope 2
* “Today” costs reflect current Scope 1-only framework at Q1 2026 prices of €75.36/tCO₂e. “Post Scope 2” costs are scenario projections based on current emission intensities and Q1 2026 carbon prices — not current obligations.
The competitive gap between India’s coal-based primary aluminium and Iceland or Norway is not primarily a process efficiency question — Hall-Héroult electrolysis is broadly similar in energy consumption worldwide. It is entirely an electricity source question. A Scope 2 extension would price that gap directly. Indian producers who have not shifted their electricity mix before that pricing occurs will be structurally uncompetitive in the EU market regardless of any other competitive advantage they hold.
Why renewable energy investment is the only structural answer — and why aluminium is uniquely positioned
For Indian steel producers, renewable energy investment provides no direct CBAM benefit today — because CBAM excludes Scope 2 for steel, and there is no confirmed timeline to include it. For Indian aluminium producers, the situation is fundamentally different: when Scope 2 is included for aluminium, every unit of renewable electricity procured directly and proportionally reduces the CBAM Scope 2 obligation.
This creates a unique three-way investment alignment for aluminium that no other CBAM-covered sector currently offers:
The CBAM cost avoidance figure of €174 million per year for a single 500,000 t/year smelter is a future scenario dependent on Scope 2 inclusion — not a current financial benefit. But the electricity cost saving and CCTS compliance benefit are real and current. The investment case for renewable energy in Indian aluminium does not require the 2027 review to go a particular way — it stacks up on present economics alone, and acquires additional magnitude if Scope 2 is extended.
Crucially, renewable energy capacity takes 2–4 years to develop, contract, and commission at utility scale. A smelter that begins the procurement process in 2026–2027 can have meaningful RE capacity operational before the potential Scope 2 extension takes effect. A smelter that waits for the 2027 review outcome before acting will have, at minimum, a 3-year gap during which it faces full Scope 2 exposure with no hedging in place.
The Big Four — where each producer stands on CBAM readiness
| Producer | Smelting Capacity | Current RE Share | RE Target / Actions | CBAM Readiness |
|---|---|---|---|---|
| Vedanta Jharsuguda + BALCO | ~2.4 MTPA production (FY25) | ~5% | 30% RE by 2030; exploring group captive models; new 4,900 MW CPP energy mix critical for new Odisha capacity | Committed but nascent |
| Hindalco Renukoot + Hirakud | ~1.3 MTPA | ~10–15% | 190 MW installed RE (March 2025); target 300 MW by FY2026 incl. 100 MW RTC with storage; Novelis EU ETS experience | Most advanced of Big Four |
| NALCO Angul, Odisha | ~0.46 MTPA | <10% | 198 MW installed wind; evaluating 200–300 MW with storage; but signed 1,080 MW thermal CPP MOU with NLCIL, Feb 2026 — extends coal dependence through the 2030s | High risk — moving in wrong direction |
| BALCO Korba, Chhattisgarh | ~0.57 MTPA | <10% | Part of Vedanta group targets; Chhattisgarh coal belt location adds grid RE transition complexity | Very high exposure — coal belt location |
NALCO’s February 2026 thermal CPP MOU with NLCIL warrants particular attention. A new coal-based CPP commissioned after 2028 will have an operating life of 25–30 years — extending well past the point where Scope 2 inclusion for aluminium is likely. Every tonne of aluminium produced from that plant’s power will carry embedded Scope 2 emissions of approximately 12–15 tCO₂/t: at projected 2030 carbon prices of €126/tCO₂e, that represents a potential CBAM liability of €1,512–1,890/t per tonne of aluminium exported to the EU. The stranded asset risk is not hypothetical — it is the direct consequence of commissioning long-lived carbon-intensive infrastructure in the current regulatory environment.
Odisha — home to Vedanta’s Jharsuguda and NALCO’s Angul smelter — offers one of India’s better industrial open access frameworks for large consumers. The state’s RE Policy 2022 provides 50% CSS exemption and 25% wheeling exemption for in-state projects. Wind-solar hybrid with battery storage delivered via open access in Odisha currently costs approximately Rs 3.5–4.5/kWh all-in — comparable to coal CPP electricity at Rs 4.5–5.5/kWh for equivalent reliability. The economic barrier to RE transition at Odisha smelters is now grid reliability and banking policy, not cost. Wind-solar hybrid plus battery storage addresses the reliability constraint. The ISTS waiver allows procurement from Rajasthan or Gujarat where renewable resources are superior. The investment case is present-tense — the CBAM case strengthens it further.
Secondary aluminium — the structural CBAM advantage that is already real
Secondary aluminium — produced from scrap rather than bauxite reduction — has dramatically lower embedded emissions than primary aluminium from any electricity source, because the electrolytic reduction step is bypassed entirely. Remelting aluminium scrap requires only 500–750 kWh/t — approximately 5% of primary smelting energy. Even a coal-powered secondary producer carries embedded emissions of approximately 0.5–1.5 tCO₂/t, well below the 1.423 tCO₂/t CBAM benchmark for primary aluminium electrolysis.
This is not a future scenario — it is a current competitive advantage under the existing Scope 1 framework, and it becomes more valuable as primary aluminium CBAM costs escalate. Hindalco’s 300,000 tonne scrap recycling facility in Gujarat and India’s growing domestic scrap pool as aluminium stock ages are enabling this pathway at scale.
The pre-consumer scrap anti-circumvention rule introduced under the 2025 Omnibus package adds a constraint: pre-consumer scrap originating from high-carbon production lines must include those upstream embedded emissions in CBAM calculations. This prevents secondary producers from claiming zero embedded emissions on scrap from coal-based primary smelters. Post-consumer scrap retains more favourable treatment — its upstream embedded emissions have been attributed to the original product lifecycle.
Frequently Asked Questions
Does CBAM currently include Scope 2 indirect electricity emissions for aluminium?
No. CBAM from January 2026 covers only direct Scope 1 emissions for aluminium — anode combustion, PFC emissions, and fuel combustion in ancillary processes. The European Commission confirmed in October 2025 that indirect electricity emissions will remain out of scope for metals for the foreseeable future. A 2027 report will evaluate if and how to extend Scope 2 coverage to aluminium, steel, and hydrogen. There is no committed legislative timeline for this extension.
Why does the 2027 review matter more for aluminium than for steel?
For steel, electricity accounts for approximately 10–15% of total embedded emissions — a meaningful but not dominant source. A Scope 2 extension for steel would add a significant but manageable cost. For primary aluminium, electricity is 80–85% of total embedded emissions from a coal-powered smelter. A Scope 2 extension for aluminium transforms the CBAM from a manageable compliance cost (€0–73/t) to a potentially existential trade barrier (€1,000–2,000+/t). No other CBAM-covered sector faces a comparable step-change from a single regulatory decision.
What is the current CBAM benchmark for aluminium and what does it mean for Indian smelters?
The CBAM benchmark for primary aluminium direct emissions is 1.423 tCO₂/t (revised downward from earlier drafts under the December 2025 implementing act). Indian smelters operating at or near this figure on Scope 1 direct emissions face minimal certificate costs today. The benchmark for secondary aluminium is 0.091 tCO₂/t — significantly lower, reflecting the energy efficiency of recycling. Under the current framework, many Indian smelters’ direct process emissions are close to benchmark, meaning their immediate financial exposure is low. The latent risk sits entirely in the Scope 2 gap that the 2027 review may address.
If an Indian smelter signs a renewable energy PPA now, does it benefit under CBAM today?
Under the current Scope 1-only framework: no direct CBAM benefit, since Scope 2 is not priced. However, the smelter gains an immediate benefit under India’s Carbon Credit Trading Scheme (CCTS), where Scope 2 GEI is a compliance metric, and an electricity cost benefit if renewable tariffs are competitive with coal CPP costs. If and when Scope 2 is included in CBAM for aluminium following the 2027 review, a smelter with documented RE delivery will have dramatically lower embedded emissions and therefore dramatically lower CBAM certificate obligations. The PPA signed today becomes the CBAM competitive advantage of 2028–2030. Note: RECs (Renewable Energy Certificates) alone — without physical renewable electricity delivery — do not reduce CBAM Scope 2 embedded emissions.
What CN codes for aluminium products are currently in CBAM scope?
Main CBAM-covered aluminium CN codes from January 2026 include: 7601 (unwrought aluminium, primary and alloys); 7603 (aluminium powders and flakes); 7604 (bars, rods, profiles); 7605 (aluminium wire); 7606 (plates, sheets, strip); 7607 (aluminium foil); 7608 (tubes and pipes); 7609 (tube or pipe fittings); and 7610 (aluminium structures). Precursor alumina and selected processed products are also covered. From 2028, 180 downstream steel and aluminium-intensive derivative products will be added. Exporters should verify their specific CN codes against the latest CBAM Annex I for product-level scope confirmation.
How do PFC emissions from aluminium smelting affect CBAM calculations?
Perfluorocarbon emissions — CF₄ and C₂F₆ generated during anode effects in the Hall-Héroult cell — have very high global warming potentials (CF₄ at ~6,630 CO₂e and C₂F₆ at ~11,100 CO₂e per IPCC AR6). Modern smelters with point-feeder technology and continuous alumina feeding can reduce PFC contributions to 0.2–0.5 tCO₂e/t. Older or poorly controlled smelters can have PFC contributions above 1.0 tCO₂e/t. Reducing PFC emissions through operational improvements is the highest-value Scope 1 decarbonisation lever available to Indian smelters under both CCTS and current CBAM — low abatement cost, immediate compliance benefit, and no capital-intensive infrastructure required.